What Happens When The Costs Of A Globalized Economy Grow Out Of Control?

You might be into eating local, but if the costs of oil balloon, you won’t have much choice about it. Cheap fuel is what powers global trade, but a future without cheap food might force a "relocalization" of our economy.

It’s not too much of a stretch to say the global economy sails on a sea of oil. Virtually everything we eat, consume, and manufacture needs oil either to grow (nitrogen fertilizer produced from natural gas), make (plastics and fossil-fuel-powered factories), or move (trucks, ships, rails, and planes).

What happens when the price of oil goes up (and up)? Global supply chains, especially those for low-value goods, could quickly become prohibitively expensive. Wal-Mart’s made-in-China bargains are cheap so long as transport costs are low enough to enable affordable access to cheap overseas labor.

Global trade depends on cheap, long-distance freight transportation.

Some are preparing for the day when that is no longer the case.

"It is an article of faith that global trade will be an ever-growing presence in the world," writes economist Fred Curtis at New Jersey’s Drew University and Rutgers biologist David Ehrenfeld in the Solutions Journal. "Yet this belief rests on shaky foundations. Global trade depends on cheap, long-distance freight transportation."

Instead, the two researchers suggest considering a "relocalization." As expensive (or even peak) oil and climate change emerge, the authors predict a painful transition to higher fuel prices and the emergence of more local economic development. This includes local currencies, community land trusts, decentralized alternative energy development, water conservation and reuse, local food production, and locally oriented business networks. Proof of the concept can be seen in cities like Shanghai, which already produces much of its own vegetables within urban limits.

"Continual growth, or even maintenance, of the current physical volume of trade is unsustainable," they predict. "Global trade will not disappear, but as it wanes and as supply chains shorten, the importance of regional and local economies will increase."

Global trade will not disappear, but as it wanes and as supply chains shorten, the importance of regional and local economies will increase.

For now, the trade data belies no hint of a dramatic shift away from globalization. Quite the opposite: Developing countries’ trade increased from $150 billion in 1990 to $902 billion in 2009, according to the UN (PDF), and the annual growth of global merchandise exports has stayed in the heady 5% to 10% range for most of 1965-2009, according to the WTO.

But Curtis and Ehrenfeld aren’t exactly predicting imminent local utopias. They are pointing out limits to cheap energy, and noting the consequences.

They also say there’s not much planning for a Plan B. Today’s trade policies and treaties depend on business-as-usual assumptions: cheap fuel, low transportation costs, and historical weather patterns. As oil prices rise well above $100 per barrel—and every additional dollar raises freight transport costs about another 1%—the global economy could look very different in our uncertain future.